People go into business with others with the best of intentions. Unfortunately, intention is never enough.
No matter who we go into business with, be it family members, ‘best’ friends, or longtime co-workers, it is extremely important that you treat the business as a business. Just because your partners may be friends or relatives is not a reason to treat things casually.
It is important that all businesses have well-drafted business documents. Doing business on a handshake is not enough. Handshakes are for when you say Sholem Aleichem or Mazel Tov, not for doing business. As I often say, a handshake deal will ultimately result in a different hand gesture between two people.
What documents should business partners put in writing? The most important document is the business agreement between the partners.
When forming a corporation, the shareholders (owners) of the corporation should have a well-written Shareholder Agreement. If an LLC is formed, the owners are called members, and their agreement is called an Operating Agreement.
In either case, these agreements outline how the business will operate and contain such information as:
- The amount of money each person will be investing in the business
- The names of the owners and their percentage of ownership
- How the business is managed/operated
- How money is distributed to the owners
- How owners can sell/give away their ownership to others
- Accounting and tax matters
Forming a corporation or LLC is a wise and cautious decision when starting a business. Making sure you have a well-written Shareholder Agreement or Operating Agreement is extremely important.
I recommend that people form entities that limit their personal liability, such as corporations or limited liability companies (LLCs). These entities separate one’s personal assets from their business assets.
These entities do the following:
- Create a separate legal entity
- Have an Employer Identification Number (EIN), which is like a Social Security Number for a business
- Limits your liability for personal, non-business assets
For example, let’s say Moshe and Ahron become business partners and form a corporation. During the course of business, they get into trouble and the business incurs $100,000 in liability, meaning that the business owes $100,000 to somebody (called a Creditor).
If Moshe & Ahron did not form a corporation or LLC, but simply operated under a partnership, the Creditor would come after the business for the $100,000. If the business only had $50,000 in assets, the Creditor could go after Moshe & Ahron for the remaining $50,000.
However, if Moshe & Ahron formed a corporation or LLC and operated the business correctly under such entity, the Creditor could come after the business for the $100,000, however, as the business only has $50,000 in assets and is a corporation/LLC, so long as the entity was formed and operated properly, the Creditor could not come after Moshe & Ahron for the remaining $50,000.
Other important documents that businesses should have include:
1. Restrictive Documents
These are documents that limit the ability of another person or business to do certain things to your business.
- Non-Compete Agreement – limits others from competing with your business
- Non-Disclosure Agreement – limits somebody’s ability to discuss certain matters regarding your business with others
- Customer Non-Solicitation Agreement – limits somebody from taking your business’s customers
- Employee Non-Recruitment Agreement – prohibits somebody from recruiting your employees away from your business
2. Worker Documents
It is important that your business have written agreements with workers that explain the job, wages, expectations and reasons for termination. The best time to have workers sign these documents is when you first hire them:
- Employment Agreements – details the relationship between your business and an employee so that the employee understands what is expected of them
- Independent Contractor Agreements – the same as an Employment Agreement, but for part-time or those who work on specific projects
- Employee Handbook – informs employees about your company’s mission, policies and procedures, and your rules and regulations
3. Intellectual Property Documents
Intellectual Property (IP) includes creations such as inventions, literary and artistic works, designs, symbols, names and images used in business.
There are four (4) primary types of Intellectual Property:
4) Trade Secrets
Because your company’s IP has value, it is important to protect it so that others don’t use it without paying you for its use.
- Intellectual Property Assignment – this document transfers all rights in and to the IP from the inventor/creator to your business
- Intellectual Property Cooperation Agreement – requires that business employees or partners who are leaving the business continue to cooperate with the future development or enforcement of business IP
4. Customer/Supplier Documents
Depending upon what type of business you have, you want to make sure that your agreements with customers and suppliers are detailed and actually say what you want them to say.
- Distribution Agreement – If you distribute on behalf of a manufacturer
- General Services Agreement – for services provided by your business
- Licensing Agreement – if your business licenses somebody else’s IP or licenses out its own IP
Many businesses encounter problems because they choose to conduct business on a handshake, without putting things in writing. This is often a mistake. When these problems arise, it is difficult to remember everything that was agreed to at that time. A way around this is to make sure that you put all of your agreements in writing.
The documents listed above are only some of the documents that your business might need. Obviously, the need depends upon the type of business you have and your specific circumstances. Whatever they may be, it is strongly advised that your business documents be drafted by an attorney experienced in drafting such documents.